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« July 2006 | Main | September 2006 »

August 30, 2006

Al Gordon, Age 105

Perhaps the neatest (to use a word from my early youth) story crossing the wires Wednesday was this one from Bloomberg on Al Gordon. He's 105 years old and has been on Wall Street since the 1920s.

Gordon is currently bearish on US stocks, partly because of the national debt:

He prefers shares of companies such as Canada's EnCana Corp., Wal-Mart de Mexico SA de CV and Petroleo Brasileiro SA. "At least three-quarters of whatever I own is foreign stocks,'' he says from his Manhattan apartment overlooking the East River.

Further down the piece:

When it comes to investing, Gordon looks for companies that will grow for years, says Arthur Byrnes, who is co-head of Deltec Asset Management with Gordon's son John. "Despite the fact that he's an old man, he buys things not for a quick trade,'' Byrnes says. "Al is a long-term investor, if you can believe that someone who's 105 years old can be a long-term investor.''

I guess some habits are hard to break, right?

Actually, some folks snicker at 89-year-old Kirk Kerkorian buying General Motors (GM/NYSE) stock as a long-term investment. Heck, he's a kid compared to Gordon.

Back to the article:

When it comes to investing, at least one of Gordon's contemporaries agrees that overseas stocks can provide more robust returns than U.S. shares.

"Al Gordon is right,'' says Irving Kahn, 100, chairman of New York-based investment firm Kahn Brothers & Co. He says global wealth imbalances and the rise of extremists should give investors pause: "You don't have to be too alert to see how much terrorism is spreading.''

Christine Harper wrote the Bloomberg piece. Hats off to her for a great profile.

Francis Chou, Part 2

If the previous post has given you an appetite for more on Francis Chou, check out this article from MoneySense, a Canadian magazine:

He has only a grade 12 education and used to labor as a Bell Canada repairman. He has never worked for a big bank or a mutual fund company. He largely shuns the Courvoisier-chugging Bay Street set. But if you're searching for the best mutual fund manager in Canada, you'll find it difficult to avoid quiet, shy Francis Chou.

Quite simply, Chou's numbers are eye-popping. His flagship, the Chou Associates Fund, has achieved compounded returns of about 16% a year for 24 years, leaving his competitors in the dust. In acknowledgment of his outstanding record, he was named the Morningstar Fund Manager of the Decade at the Canadian Investment Awards in 2004. "The reason he got the award," says Scott Mackenzie, president and CEO of mutual fund research firm Morningstar Canada, "is because he's head and shoulders above anyone else in terms of risk-adjusted performance. That means he not only achieved superior performance, he did it in a way that his results were substantially less volatile than other funds like his."

Then this:

How did this immigrant from Allahabad, India, who came to Canada back in 1976, beat the best and brightest that Bay Street has to offer? It's not an easy question to answer, because Chou is a very private man. He has granted few interviews over the last 20 years and when he does talk, he avoids discussing his personal life. Chou seems to be mystified as to why anyone would care what his parents did (his father was a professor and his mother a university lecturer), how old he was when his dad died (very young), or how many brothers and sisters he has (one older brother, three younger sisters, all now living in Canada). He sees himself as a regular sort of guy who showed up in Canada at age 20 with $200 in his pocket, landed a job at Bell Canada, and proceeded to become fascinated by the writings of Benjamin Graham, the Wall Street financier widely regarded as father of value investing.

The whole piece is good. I encourage you to read it all.

But keep an eye out for this bit at the end. It should have a familiar ring to it:

No other fund manager in Canada, and few in the U.S., have matched Chou's long-term performance. George Athanassakos, professor of finance and the Ben Graham Chair in Value Investing at the Richard Ivey School of Business in London, Ont., thinks that Chou might be right: perhaps he's not outperforming because of superior intelligence, better connections or charisma. Maybe it's because Chou's natural disposition just happens to be a perfect match to the investing style he's chosen. "Like other value investors, Francis strikes you as being very humble, very low profile, very quiet. He doesn't beat his chest and say 'I'm the best.' But that's the strength of the value investors: they master their emotions. They're patient. They don't want the world to pay attention to them. They want to invest privately and under the radar."

Francis Chou

Canadian Francis Chou is an officer of Fairfax Financial Holdings (FFH/NYSE). He also manages several mutual funds north of the border and has become one of the best value players anywhere.

His flagship Chou Associates Fund is up 11.7% in US dollar terms through June 30 -- even while holding more than 30% in cash.

Chou has just released his mid-year report for all this funds, which you can find here.

August 28, 2006

CBS: A Case of "Les is More"

By "Les" I mean Les Moonves. And by "more" I mean creating more shareholder value in CBS (CBS/NYSE).

Nothing goes straight up, but we can expect seeing more and more mentions of the company like this one from Barron's as time goes on:

Away from the celebrity headlines, the more solid reason to give CBS shares a look is that it represents one of the most undervalued cash-flow streams from radio, TV stations and billboard advertising available. And, even better, management is doing what it can to realize some of that value and share it with stockholders.

Aside from the CBS network and production assets, the company owns 179 radio stations, 39 TV stations, a major outdoor-advertising division, Showtime, publishing house Simon & Schuster and an array of online media assets. In the first half of 2006, TV and radio contributed the vast majority of CBS' $1.5 billion in operating income before depreciation and amortization.

CBS trades for less than nine times its enterprise value (equity market value plus net debt) to cash flow, defined among media companies as earnings before interest, taxes, depreciation and amortization. Comparable companies to each individual CBS segment routinely fetch substantially higher multiples. CBS, in fact, has been divesting radio stations, and recently sold 15 of them in four markets for 14 times trailing Ebitda.

This a bit further down:

The media sector is disdained among large investors after so many years of weak returns and the well-understood long-term headwinds presented by ad dollars migrating online. There have been signs that perhaps the stocks are stabilizing at last. TV and radio outlets -- the main drivers of CBS' earnings -- are set to get a bump from mid-term election ad dollars, too.

Adding it together, a value for CBS in the low- to mid-30s doesn't seem all that challenging. With its 2.3% dividend yield, the possible return gets that much more interesting.

Moonves sold off CBS' theme parks division earlier this year. In addition to selling off radio assets, look for him to auction off the publishing division at some point.

And he's committed to increasing the dividend -- and even start a stock repurchase program.

As I ALWAYS caution on this pick, we're still in very early innings and a lot can happen. But it's looking like a case of "Les is More" for CBS shareholders.

How much more only time will tell.

Prudent Speculator Bullish on Housing Stocks, GM

John Buckingham edits the Prudent Speculator newsletter and the Al Frank mutual funds. He's profiled in this article from the Orange County Register:

Buckingham's been into building stocks since 1998 – and isn't budging. For example, he bought D.R. Horton when it was $3 almost a decade ago, saw it rise to just above $40 only to get sliced in half.

His newsletter currently recommends 18 different builders, as part of a broadly diversified portfolio. His funds are 9 percent invested with builders.

Buckingham thinks building stocks get whipsawed because investors still mistakenly think of the business as a bunch of corporate cowboys making wild bets on raw land. This generation of builders matured their practices into a better-run, better-financed craft. Buckingham says the industry has the financial muscle to ride out the current choppy waters.

It's a downturn that Buckingham insists is nowhere as bad as the press clippings suggest.

I don't own any homebuilders -- that's not a sector call. I just don't own any.

I do, however, own one stock Buckingham likes. Read on:

Buckingham notes a favorite holding – a company that's been the top performer among the Dow Jones 30 index in 2006. This company isn't a tech giant or entertainment wizard. Rather, it's been maligned on Wall Street and in the media as a financial disaster waiting to happen.

The hot stock? General Motors, up 53 percent in '06.

"We sift out the emotion," Buckingham says.

Value investing, which Buckingham practices, is often about testing one's stomach lining. This work means doing all the same research as other investors do – then frequently placing your bets on companies that all those other investors found distasteful.

I don't know if Buckingham is right about housing stocks. Or GM for that matter. But the article writer nails it about value investing testing the stomach lining.

August 24, 2006

How to Buy Stocks Listed on Foreign Exchanges

One of the questions I get most often from readers deals with buying stocks not listed on American exchanges.

I’m dedicating this post to answering that question. But be warned:

This is a seriously long post. You may want to bookmark it for later.

This question about buying foreign stock comes from individual investors. They want to know how I bought shares of a certain company when it has no American Depository Receipts (ADRs) and I’m residing in the good ole USA.

That makes sense. The readers of this blog working inside the industry are with institutions with offices scattered around the globe. Or their firms have established relationships with brokerage outfits in the nations they’re investing in. Either way, if they want to buy stock in a company listed in Tokyo or London or Singapore, it’s no problem.

Of course, there are some individual investors with enough assets -- think Jim Rogers -- where it makes sense bother with opening brokerage accounts in various countries around the world.

I’m not in that league, so I’ll tell you how I go about buying foreign stocks not trading in the States.

But first, please understand this:

I make no claim to possessing exhaustive knowledge on this subject. I have only ever dealt with one brokerage firm in this regard and I’m content with their service. You may or may not have a better option that I do. You may or may not uncover a better way to buy foreign stocks when researching this topic. I’m just telling you what works for me.

Fair enough? Okay, here we go.

I use Charles Schwab’s Global Investment Services. You can reach them toll-free at 1-800-992-4685 during normal business hours. Call and ask what account minimums are required. Feel free to tell them you heard about them through Controlled Greed.com. The Schwab people are excellent at explaining commissions, expenses and any share purchase minimums required by individual foreign exchanges before placing your trade.

You will NOT able to place these trades online. The exception (I believe) is with Canadian stocks. Several years ago I bought Fairfax Financial Holdings before it listed in New York. But I wasn’t able to place the trade using Fairfax’s Canadian symbol. The Schwab phone rep gave me a special ticker to use to place the trade online, and I paid the same commission I would have if I’d bought a stock normally trading in the US.

I haven’t purchased any stock listed in Toronto since then, so I don’t know what the current procedure is for buying Canadian shares. The last Canadian stocks I’ve purchased as of this writing were additional shares in Fairfax and a new position in BCE Inc. Both now list on the NYSE as well as the TSE. That brings up another point.

You WILL pay higher commissions to buy shares on foreign exchanges. How much may depend on the particular exchange, the amount being purchased and some such. Again, Schwab has always been excellent at explaining what the cost will be for me before my order gets placed.

But if you’ve got your heart set on paying $7 or $9.95 or $12.95 for one of these trades -- forget it.

You’re going to pay MULTIPLE times those amounts depending on the trade in question. Is it worth it? Only you can answer that question for you.

For me the answer is a resounding “yes” -- even when there’s an ADR trading over-the-counter. Let me give you an example:

I’ve been eying an Australian stock lately. It has an ADR trading VERY illiquid on the OTC. Most days it doesn’t trade at all. Even when it does, it just trades a couple of hundred ADRs or thereabouts. To establish a full position for my portfolio, I’d need purchase thousands of ADRs. It would be a pain getting the order filled – and might take multiple orders at that. This company trades daily in Australia and New Zealand. It’s very liquid on those exchanges.

So if I pull the trigger, I’ll gladly call Schwab’s Global Investing Service and pay a higher commission. I think doing otherwise is a case of being penny wise and pound foolish.” But that’s just me.

Furthermore, I do own the ADRs of Nikko Cordial that were purchased on the OTC. If I had it to do over again, I would buy the ordinary (“common”) shares in Japan. And for the same reasons I just mentioned. Nikko Cordial ADRs trade thinly but the ordinary shares are very liquid in their native country.

Schwab sometimes fills these orders by purchasing foreign shares in OTC markets that only brokers can access. For example, I currently own stock in Takefuji Corp. It trades in Japan under symbol “8564.” There is also an American OTC symbol -- “TAKAF.” But that symbol is for the use of brokers who may be able to fill the trade with a market maker in the States. You can try typing “TAKAF” online to get that order filled, just don’t expect it to go through.

Anyway, whether your order is filled overseas or by Schwab on the OTC market, they’re the same ordinary shares -- they’re NOT ADRs. It sounds confusing I know. Yet there you have it.

So now you know what I know about buying stocks listed on foreign exchanges. Whether you think I know a lot or very little, I hope this post is helpful if you're interested.

Remember, I’ve only dealt with Schwab and am happy with their execution and service. I can’t tell you where to go other than Schwab, except perhaps the following:

If you have a brokerage account with a full-service broker such as Merrill Lynch you can probably arrange these transactions. Again, account limits and other conditions may apply so ask your broker.

I have no idea what outfits like E*Trade, Scottrade or other discount and deep-discount brokers offer in this regard. You’ll have to check with them. I recently received an email from a Toronto reader saying he checked with E*Trade in Canada and was told they couldn’t buy Takefuji.

Keep on eye on Kathy Yakal's "Electronic Investor" column in Barron's. She frequently writes on brokers and occasionally devotes part or all of a column on buying stocks in non-US markets.

Finally, my advice is this:

If you want to buy stocks on foreign exchanges, be prepared to pay extra. There are added costs for brokers and dealers in executing these trades, which translates into added costs for you the buyer.

If your broker says he or she can’t execute one of these trades for you, tell him or her to get in the 21st Century.

And then seriously consider getting yourself another broker.

August 23, 2006

Takefuji Coping with Uncertainty

If you've been reading this blog, you know that portfolio holding Takefuji Corp. (8564/JP or TAKAF/OTC) has seen its stock price suffer.

One factor is uncertainty over the maximum interest rate consumer lenders like Takefuji may charge.

Another is continuing investigations into the practices of consumer lenders in Japan.

The latest development on this front broke overnight with an Asahi newspaper report that consumer lender Acom Ltd. is being probed for the second time this year. Bloomberg describes the news:

Regulators are now investigating Acom because the company is suspected of engaging in various illegal lending practices such as providing loans without giving borrowers all the necessary paperwork, the Asahi said.

Fortunately, Takefuji was only down 1% on the news. Perhaps confirming what one analyst told The Wall Street Journal recently -- that Takefuji may have seen its bottom in the washout among Japanese consumer finance companies.

That may be true and, as a shareholder, I certainly hope it is.

Yet Takefuji must still cope with those uncertainties mentioned above. And they will discourage investors until after they are cleared up. More from the Bloomberg report:

"We just don't know how much more bad news will come out and what will happen to the tightening of regulation for consumer lenders,'' said Masayuki Kubota, who oversees $2.1 billion at Daiwa SB Investments Ltd. in Tokyo. "I'll continue to avoid the stocks until the outlook becomes more clear.''

Well, I haven't avoided Takefuji. And, as Mr. Kubota could tell us, that's what makes a market.

If I'm right, then these uncertainties have created an excellent opportunity to buy a cash-rich company on the cheap. If you're willing to hold on for the long term.

But I could be wrong -- I don't think so, but I could be. There are no guarantees, remember. ;-)

August 22, 2006

Uzbekistan Fertile Ground for Value?

Last week, a conference was held that focused on attracting foreign investment to Uzbekistan.

This bit from the linked report catches my eye:

James Morton, director of British investment fund Cundill Investment Research Ltd, said the Uzbek market is attractive for foreign investors. He said Cundill Investment Research Ltd is interested in CIS markets, in particular Uzbekistan. Morton said the company is interested in retail trade companies and agriculture producers.

Actually, Cundill is a Canadian outfit. No big deal. My hunch is that the person writing the report was confused because Morton is (I think) British and is based in London. What's more, Peter Cundill himself has been based in London for years -- though the man is renowned for his travel schedule.

The only guy with a bigger rep for globe-trotting is Templeton's Mark Mobius.

I don't know that I'll be a buyer of Uzbek securities anytime soon. But the Cundill folks are top-notch value investors and among the best applying the approach globally.

So this is worth watching.

USA Mobility Director Buys Nearly $29.6 Million of Stock

Barron's Online has an online exclusive about David Abrams spending almost $29.6 million to buy more than 1.4 million shares in USA Mobility (USMO/NASDAQ) between August 11 and 16.

Abrams is a director of USA Mobility and oversees Abrams Capital Partners. He also used to work with Seth Klarman at Baupost Group. (Baupost also owns USMO stock.) These most recent purchases are for Abrams Capital, and the firm now owns roughly 3.9 million shares or 14.4% of the company.

This from the linked article:

Amid a stream of negative news about the company's weakening operations, USA Mobility shares have fallen sharply since going public at around $36 per share nearly two years ago. But the stock has gained 45% since touching a record low of $15.67 on June 27.

The piece quotes Ivan Feinseth, managing director at Matrix USA, as saying, "The fundamental value drivers are negative." He then says USA Mobility is under-earning its cost of capital as the return on capital and free cash flows continue to fall off.

He asks a probing question. "Why do you have a pure pager if you have cell phone with text messages?" Feinseth, who has a Sell rating on the company, appears to be the only analyst actively covering the stock.

In an investor conference earlier this month, USA Mobility's management estimated it will have roughly 4.1 million customers this year compared to 7.68 million three years ago, and revenue of about $500 million this year, down from $1 billion n 2003.

The Barron's Online article also quotes Ben Silverman of InsiderScore.com, who says USA Mobility fits Abrams' investment style and calls the recent purchases "an interesting play."

"The way I look at this is you have a wild card here, he adds. "Obviously the company's business is eroding, but [USA Mobility] continues to churn out cash flow and return cash to investors."

USA Mobility made a special dividend grant of $3 per share, or $82 million, in July before declaring a quarterly dividend of 65 cents per share. Management announced it was confident that the company's cash flow would sustain the regular payout at this level or higher for five years.

Further down:

Noting Abrams Capital's investment horizon of 18 to 36 months, Silverman says that with the dividend payout Abrams may "feel comfortable putting money in this investment and getting a return on yield."

You'll recall that last week I posted about USA Mobility moving to paying quarterly dividends. So returning cash to shareholders has to figure in to the ultimate success --  or failure -- of this stock pick.

I first recommended USA Mobility in August 2005 at $26.34. The shares closed yesterday at $22.59.

August 21, 2006

Micheline Maynard

Micheline Maynard writes an excellent piece in Saturday's New York Times on Ford, which mentions portfolio holding General Motors (GM/NYSE).

She was also interviewed in the third hour of Bob Brinker's Moneytalk radio program on Saturday. She said we could eventually reach the point where there is only one major American auto company. I was driving in my car and not taking notes, but I believe Maynard stated that GM was in better position to be that company.

Note she wasn't making a prediction.

And note she wasn't saying there would only be one American auto company if this non-prediction came to be.

But her reporting, from what I've read, seems sound and level-headed. Several months ago Maynard was again interviewed on Brinker's program at the height of the GM bankruptcy media mania -- and she said then she doubted the company would go bankrupt.

That doesn't mean she's right. Or that I'm right in believing GM will turn out to be a profitable investment. And make no mistake, Maynard is not a stock-picker and is not recommending people buy GM shares.

I did. And I do. And reading the reporting of fine journalists like Micheline Maynard is indispensable in keeping tabs on this particular investment.

August 18, 2006

CBS Raises Dividend by 11%

Earlier this week, CBS (CBS/NYSE) announced that it was increasing its dividend for the third time since January. The linked Wall Street Journal article reports the latest increase is 11%, from 18 to 20 cents a share.

Regular readers of this blog know that CBS CEO Les Moonves is committed to rewarding the company's shareholders. Primarily through dividend increases, and perhaps through stock repurchases:

"Our goal is to return money to shareholders and be smart about what we do with free cash flow," he said. "We're very happy with our hand and are not looking at large acquisitions."

Mr. Moonves said a stock buyback is possible in the future. A CBS spokesman said the company also wants to have cash on hand as it completes the sale of radio stations in 10 markets because a portion of the radio-station deals could be tied to swaps or acquisitions.

I reported buying CBS last February at $25.61 per share. The Class B shares that I own closed yesterday in New York at $27.45.

We're still in very early innings with this investment. But I really like Moonves and I get a kick out of owning stock in such an unloved, boring, "old media" company.

I just hope that when all is said and done, CBS stock doesn't turn out to be a kick in the you-know-what. ;-)

The Asset Allocator! Goes Dormant

Within days of launching Controlled Greed.com on April27, 2005, I started getting referrals from The Asset Allocator! blog.

The Assetman wrote one of the very best "news digest" type sits out there, and further stood apart from the crowd with this keen sense of humor. I was heartened when he almost immediately linked to this site and even pointed it out to his readers. I'm also gratified that Controlled Greed.com has ranked in the top seven referrers to The Asset Allocator!

Unfortunately for readers everywhere, The Assetman has put his blog in "Dormant Mode." He says he'll be back one of these days.

Let's all hope that day arrives soon.

August 17, 2006

Movement Among GM's Major Shareholders

Bloomberg reported yesterday some selling -- and a little buying -- of General Motors' (GM/NYSE) stock among its major shareholders in the second quarter.

State Street Bank and Trust, GM's largest shareholder, boosted its stake by 400,387 shares.

Capital Research, the second-largest shareholder, slashed its stake by 24% and Brandes Investment Partners, the third-largest, sold 4% of its holding.

Kirk Kerkorian's Tracinda Corp. is the fourth-largest shareholder and not mentioned in Bloomberg's report. He's probably standing pat. GM is exploring the proposed alliance with Nissan and Renault. And, besides, if Kerkorian did anything with his holding in the auto company it would be big news.

Southeastern Asset Management is GM's fifth-largest shareholder. Its Longleaf Partners Fund is maintaining its 14.2-million share holding. But Southeastern trimmed its other (non-Longleaf) GM holdings by 145,000 shares.

What to make of this? Not much.

I don't know the average cost of the sellers' GM positions. And to be honest, I'm not overly familiar with State Street or Capital Research.

I do know that I remain cautiously optimistic about further appreciation in GM's stock. Even though it's up more than 50% this year. Just remember that these things usually aren't straight lines up.

P.S. Yesterday, I referred to a investor Eddie Lampert having a small position in GM. The linked Bloomberg report states that Lampert sold 64% of a previously undisclosed GM stake. I don't want to give the impression that he may have just established a GM position.

August 16, 2006

Hawkins and Cates Give No Hint

Mason Hawkins and Staley Cates give no indication of what they favor regarding the proposed alliance between General Motors (GM/NYSE), Nissan and Renault, according to Longleaf Partners' semi-annual report.

They simply state that GM shares have peformed well both in the second quarter and the year-to-date. And they report its agreement to sell 51% of GMAC, the larger-than-expected number of employees accepting buy-out offers, and the exploration of the proposed alliance.

This is no surprise -- I've stated before that Hawkins and Cates almost certainly wouldn't go public on this. It's not their style. I've also said that, with Renault accounting for more than 5% of Longleaf's International Fund, their analysts have insight on any merits of the proposed alliance.

Anything they're saying to the players in this -- Kirk Kerkorian, Jerry York, Rick Wagoner, Carlos Ghosn -- is being voiced privately.

Of course, it may also be that Hawkins and Cates are just sitting back and waiting for the GM board to finish its due diligence. No harm in that.

But with the amount of GM stock they control, Hawkins and Cates could be key in what happens.

P.S. Courtesy of VInvesting, comes the news that Eddie Lampert now has a small position in GM.

August 15, 2006

USA Mobility Moves to Quarterly Dividend

Shirley Lazo reports in the current Barron's that portfolio holding USA Mobility (USMO/NASDAQ) voted last week to begin paying quarterly dividends:

The payout will be 65 cents a share, and the initial disbursement is slated for late in the fourth quarter. USA Mobility on July 21 paid a special dividend of $3, worth approximately $82 million, on its 27.3 million common shares outstanding. That followed a $1.50 bonus ($41 million) last December. The proposed dividend translates into some $71 million annually to investors.

This follows further down:

USA Mobility became debt-free a year ago after repaying $140 million in bank borrowings used to fund its formation. Cash on hand last June 30 was $109.2 million, versus $42.6 million the same time last year.

A reader reminded me last month that looking at payouts was instrumental in assessing USA Mobility's portfolio performance.

That's true for several other holdings, such as 3i Group (III/LN) and I think BCE Inc. (BCE/NYSE).

You can read my original rationale for owning USA Mobility here.

August 14, 2006

Lex on Comcast

The Lex Column in the Financial Times discusses US media in general and portfolio holding Comcast (CMCSK/NASDAQ) in particular:

If content is king and distribution is under pressure from the advance of new technologies, how come Comcast has quietly become the most valuable media company in the US? Since the beginning of April, the cable operator’s shares have soared 30 per cent, to produce a market capitalisation of $72bn.

Then this further down:

For now the changes on the internet are actually working to the advantage of the cable operators. Take video. While some choice is beginning to appear online, consumers are not about to switch off their cable video service – as they might cancel their traditional phone line in favour of wireless or internet telephony. In fact, an explosion of online content is encouraging a desire for ever faster internet connections. That is helping to keep cable broadband subscriptions growing at a healthy rate and underpin pricing. Meanwhile, cable is adding internet telephony as a third service across those broadband connections. Pricing of that service is sure to come under pressure, but it is currently driving new growth.

And the Lex editors end their take with this:

Admittedly, Comcast is not the only one to have crept up on Time Warner. Disney and News Corporation are both within striking distance of its market value. It remains likely that companies with the best content will receive a boost over time as distribution opportunities proliferate. Still, while life will undoubtedly get tougher in a few years, investors should not underestimate the resilience of the cable operators.

You can read my original rationale for buying the Comcast -- I own the Special Class A shares -- here.

Flint on the GM-Renault-Nissan Dance

My post last week linking a column by Forbes' Jerry Flint was really popular with this blog's readers. On the heels of that comes this piece by Flint -- where he pens a "Q&A" on the proposed alliance between General Motors (GM/NYSE), Renault and Nissan:

Q. Can the present General Motors managers save GM?
Doubtful. They haven't been able to do it in 14 years, so it's optimistic to think they can now.

Q. But isn't General Motors turning around now--slowly, but turning?
A. Not really. The crisis will intensify as fuel prices hurt the sales of full-size pickups, as the pressure grows to return to give-away prices and as the union resists givebacks.

Then these a bit further down:

Q. If the deal goes through, would this put Captain Kirk in the driver's seat at GM?
A. Forget that. Kerkorian would have his 10% and nothing more. If Carlos Ghosn goes into GM, he runs his own show and is no patsy for this shareholder or anyone else.

Q. Is Rick Wagoner Jr., the GM chief executive, going to sabotage his talks with Carlos Ghosn?
A. Absolutely not. Rick wouldn't tarnish his honor that way, not for the job, not for anything. He'll play it straight.

Q. Would Ghosn end up running GM?
A. He might, or he might pick new GM managers and visit them every two weeks. But make no mistake, he'd be the boss.

Read the entire article for Flint's complete list of answers. You and I can agree or disagree with him, but he's been covering the auto industry since 1958. So his views are worthy of consideration.

August 11, 2006

Takefuji Founder and Former Chairman Dies

News broke overnight that Yasuo Takei, founder of consumer lender Takefuji Corp. (8564/JP or TAKAF/OTC) and Japan's second-richest man, has died at the age of 76.

The linked Bloomberg report says:

Takei's death, almost three years after he stepped down as chairman, prompted a rally in Takefuji shares, which gained 5.3 percent to 5,780 yen in Tokyo today. Investors view the lender as a possible takeover target, and Canadian financier Peter Cundill increased his holding last month for the second time this year.

"The rise in Takefuji's share price today is probably based on a view that it will become an acquisition target after the former chairman's death," said Tsuyoshi Segawa, an investment strategist at Shinko Securities Co.

Takefuji earned 46.9 billion yen ($405 million) in the year ended March 31 and had total shareholder equity of $8.4 billion, according to data compiled by Bloomberg. That cash pile has attracted interest from buyout funds, which could use it to finance an acquisition.

The report ends with this:

Expectations of a takeover bid were refueled last month when Peter Cundill & Associates (Bermuda) Ltd., the second- biggest shareholder in Takefuji, raised its stake to 8.53 percent from 7.33 percent. Overseas investors hold about 56 percent of the company, according to data compiled by Bloomberg.

As you know, I added to my Takefuji position on Monday.

Even with the pop in the share price, I'm still underwater with this pick -- but optimistic it will turn out to be a profitable investment.

Breakingviews: Inflation Trumps Terrorism and War as Market Threat

From the Breakingviews column in this morning's Wall Street Journal Europe:

The foiled plot to blow up as many as 10 aircraft flying between the U.K. and the U.S. is a reminder that political risks to the global economy are mounting. It's just over a year after the last big terrorist outrage in Europe -- the July 7 bomb attacks in London. Perhaps investors had become too complacent. Despite the deteriorating situation in the Middle East, the markets snapped back quickly after the correction in May and June. The markets did not seem worried the conflict would upset the global economy.

The editors feel that is most likely the correct assessment. Then go on to point out that events in Lebanon and Iraq have yet to spill over into a wider regional crisis.

They end this first segment of the column with this:

That suggests the bigger threat to the markets is still economic. Inflation is picking up. Interest rates are rising. Growth is expected to slow in the U.S. The Federal Reserve is trying to steer a precarious course between fending off inflation and not squeezing consumers so hard they lose their nerve. A successful terrorist attack could at any moment upset that calculation. But until then, investors should focus their anxiety on whether the Fed is up to the task.

Regular readers know I don't "do" the top-down stuff. It's too often just market noise that doesn't mean anything much over the long term, IMHO.

But I respect the Breakingviews editors immensely, and enjoy their analysis.

August 10, 2006

Flint: Costs Aren't the Real Problem with GM and Ford

Jerry Flint's "Backseat Driver" column in Forbes is a consistently great read. And his columns concerning portfolio holding General Motors (GM/NYSE) are especially worthy of praise because of his evenhanded analysis throughout the GM hoopla over the past year-and-a-half. That's the case even if you or I don't always agree with his opinions.

Flint's latest column stresses that GM and Ford need to do more than cut costs:

One thing is clear: GM and Ford did not lose a million annual sales apiece because their costs were too high. Those sales were lost because the product, particularly the passenger cars, did not hit enough high spots.

Then a bit later he pens this:

The problem is that Pontiac only expects to sell 25,000 G6 convertibles a year. Why not 50,000? It's the best convertible bargain in the world. And if I were looking for family sedan for myself, I'd probably take the Chevy Impala over the six-cylinder Toyota Camry or Honda Accord. The Impala has more room and a lower price.

This part of the column will pop out to any GM shareholder:

GM's second quarter loss in North America was only $85 million compared to nearly $1.2 billion a year ago. Several men deserve some credit for that improvement. The first is Rick Wagoner, Jr., GM's besieged chief executive. Second is Robert Lutz, vice chairman who has pushed hard to improve the cars, outside and inside. Third is Gary White, the creator of the new big pickups and sport utility vehicles. These SUVs are off to a promising start despite the sharp increase in gas prices. While I am praising GM executives, I believe that Mark LaNeve, who heads sales/marketing, is the best man in that post at GM in half a century. You read me right, half a century.

Talk is cheap and anyone can have an opinion.

But that's some praise coming from Flint. I hope it gets shared with the car-buying public.

August 09, 2006

More Speculation on 3i Takeover

The Financial Times has a couple of pieces on portfolio holding 3i Group (III/LN), this one speculating on the firm being bought out. (There was some fairly hot and heavy rumors early in the year.)

Perhaps it should not be a complete surprise therefore to hear rumours that 3i could attract its own buy-out bid from an envious rival. A rising share price means it would no longer be cheap, but more aggressive US funds might feel they could sweat its portfolio of assets even harder and they seem to have more money than targets right now. When you run out of conglomerates to break up, what better than turning on your own?

This bit from earlier in the article explains, in part, on what makes 3i attractive to potential bidders:

3i is an odd beast by the standards of the big US buy-out partnerships that claim our attention right now, but its smaller scale has not held it back. In particular, the well-worn mix of publicly-quoted parent company and private fundraising seen today is just the sort of thing Kohlberg Kravis Roberts and others are seeking to recreate by listing in Amsterdam.

More importantly, 3i does what it does well. Eurofund V will be invested in about 50 investments across Europe over approximately four years and will be the largest fund focused on the mid-market space.

Icahn-oclastic Shareholder Victory

I didn't think Carl Icahn had much of a chance of getting anything done when he began presurring KT&G a while back.

Fortunately for the Korean company's shareholders -- and I'm not one, darn it -- I was wrong, as this Bloomberg report shows:

KT&G Corp., South Korea's biggest tobacco company, said it will return 2.8 trillion won ($2.9 billion) to shareholders, meeting two of the demands by U.S. investors Carl Icahn and Warren Lichtenstein.

The tobacco maker will buy back and cancel 12 million shares, or 7.5 percent of outstanding equity, over the next three months, KT&G said in a regulatory filing today in Seoul. The Daejon-based company will also increase its dividend in fiscal 2006 by more than 40 percent to 2,400 won a share.

That's pretty good.

Maybe Icahn can work the same magic with Media General (MEG/NYSE)?

August 08, 2006

Adding to Media General

I bought more Media General Class A (MEG/NYSE) stock today at $37.87 per share. The stock ended Tuesday at $37.30.

I first recommended Media General in March at $47.05. The average cost for the position is now $44.76.

As with the addition to Takefuji yesterday, I think I'm averaging down with this pick as opposed to catching a falling knife. But there's no guarantee of that and only time will prove whether I'm correct or not.

August 07, 2006

Adding to Takefuji

I bought more stock in Takefuji Corp. (8564/JP or TAKAF/OTC) today at US$46.90 per share. I first bought the stock in April at $62.50.

The average cost for this position is now $57.30.

Am I averaging down or catching a falling knife? I think the former but time will tell.

August 06, 2006

The Case for BCE Inc.

As reported previously, BCE Inc. (BCE/NYSE) was purchased at $23.01 per share. BCE is Canada’s largest telecommunications company. Its Bell Canada subsidiary accounts for 90% of revenues, providing traditional phone service, wireless service, Internet access and video services. Its Bell Globemedia subsidiary provides content to CTV television and publishes The Globe and Mail newspaper. Another subsidiary, Telesat, is in satellite communications.

BCE has approximately 891.4 million shares outstanding with a market capitalization of more than $20 billion. The company currently trades at 1.87 times stated book value, just over 14 times earnings and 1.21 times sales. It pays a dividend yield of more than 5%.

The company’s stock is down because of concerns over its declining legacy phone operations. These concerns are real, for BCE as well as virtually every other established phone company. In the case of BCE, some analysts estimate it will lose as much as 25% of its telephone customers to cable over time.

But BCE is pursuing strategic restructuring initiatives to extend its leadership position and boost the stock price.

Primarily, this means adding customers to its wireless, video and high-speed internet operations at a rate that makes up for losing residential landline customers. The company is therefore shedding jobs in its traditional phone unit and focusing on the growth businesses.

BCE is also rewarding shareholders through payouts and stock repurchases. The company increased its dividend in 2005 and may do so again. BCE announced its intention to repurchase 5% of its shares during the 12-month period ending February 2007.  And, with its solid balance sheet and ample free cash flow generation, look for BCE to continue paying dividends and buying back stock.

What’s more, many analysts are bullish on BCE’s management team, including CEO Michael Sabia and Bell Canada COO George Cope. And the regulatory and competitive arena BCE faces in Canada may be more favorable than those faced by its US peers, where the battlefield is more crowded.

Risks with this pick:

  • BCE’s plan to replace its traditional phone customers with wireless, video and high-speed internet services users just never materializes at the levels needed.
  • Pricing competition from wireless and cable phone service (VoIP) companies erodes profits.
  • An unfavorable regulatory environment develops.
  • Currency fluctuations.

I'm bullish on BCE as a long-term investment. But please, do your own due diligence before buying.

UPDATE 5/25/07: I trimmed the BCE Inc. (BCE/NYSE) position by 25% earlier today. The shares were sold this morning at $36.31. BCE remains a full position even after this partial sale -- being just shy of 5% of the portfolio. It still looks like BCE will get taken private. But it's prudent to take some chips off the table. Especially if the private equity boom turns out to be a bubble that gets popped before the company gets taken over later this year. That's not a prediction, but a possibility.

August 04, 2006

Sir John Templeton

This piece by newsletter writer Mark Skousen lists Sir John Templeton's five-step formula for achieving financial independence. If that sounds like something more suited to financial planning blog, you're right.

This is the part of Skousen's article that catches my attention -- as a backdrop to picking stocks in today's world:

Last year, I saw Sir John . . . on video at the London Money Show. He is 93 years old, but looked very alert, and although he spends more time on his religious and charitable work, he remains an avid investor.

I must admit, I was shocked by his answers to a series of questions:

Terrorism? "Not a serious threat... it's unimportant."

Wall Street scandals and Sarbanes-Oxley? "Not a major problem for business."

Inflation? "Not to worry." (And gold? "Not a bull market!")

Future dollar crisis? "No way."

Economic growth? "I see no interruption in our standard of living, which could be 100 times better by the end of this century."

The only concern he expressed was about "creeping socialism" and government regulation of business around the world.

DeCloet: "Market is Pricing Fairfax Logically"

Derek DeCloet of the The Globe and Mail opines that regardless of the merits of its legal action against short sellers, Fairfax Financial (FFH/NYSE) deserves to have its stock trading at a discount:

If a fraction of the claims are true (they have not been proven in court), then Fairfax is dealing with a very sleazy bunch here. But the heart of the lawsuit is Mr. Watsa's view that the conspiracy brought about "massive declines in Fairfax's stock price."

The implication, of course, is that the company is undervalued -- that the stock would be worth more than its current price, $120 (Canadian), if not for the nasty tricks campaign of the short sellers. Could that be true?

Maybe the shorts are nasty people, but that isn't why Fairfax's stock is down according to DeCloet:

What kind of return would you need to compensate you for the risk in a highly leveraged insurance holding company? It's a lot higher than 6.3 per cent. But the only way to get it is (a) if Fairfax starts generating a much higher profit and return on equity, or (b) if you pay much less than book value.

Since the investor can't control Fairfax's profitability, he chooses (b). If we had to guess, we'd say the "correct" price for a stock with an ROE this low is probably two-thirds of book value -- or about $120 in Fairfax's case.

Fairfax seems undervalued to me -- and I remain optimistic its true value will be realized over time.

But you have to read as much stuff as possible when managing your own money, and not only columns cheering your point of view.

August 03, 2006

Buying BCE Inc.

A full portfolio position in BCE Inc. (BCE/NYSE) was purchased today. The shares closed in New York at $23.01.

I'm swamped with non-blogging duties (yet again) and don't have time put my notes into a posting this evening. And won't have time Friday morning, either.

But I want to report the purchase to readers and I will have my rationale for buying the stock up on the blog in the next day or so.

One thing attracting me to BCE is that it is in telecommunications -- an area shunned by most investors. Competition is fierce and new technology is always a threat. Yet my hunch is that these concerns are factored into the stock price, making this company a textbook example of an out-of-favor bargain. More later.

New Order Placed

I've placed an order to buy stock in an integrated telecommunications services provider. This will be a new position in the portfolio.

I'll post the rationale for owning the stock after the order gets filled.

August 02, 2006

Book Value: Margin of Safety

Alex, a regular reader of Controlled Greed, emailed this message to me yesterday:

"I love how the mainsteam media is always behind the blogosphere."

And he included this link to a BusinessWeek article on Seth Klarman's book, Margin of Safety: Risk-Averse Value Investing Strategies for the Thoughtful Investor, now out of print.

Alex's point is spot on. But better late than never, as they say. And the piece is good stuff:

Still, over the past few years this work has taken on iconic stature among value investors. Originally listed at $25, the title trades for top prices on the used-book market. About a half-dozen copies are for sale online: The best deal is $700 from a seller at Amazon.com. Another vendor offers it for nearly $2,500.

There are other ways to get hold of it. One entrepreneur even rented it out on eBay for $75 a week, promptly drawing a customer. University libraries report it as one of their most wait-listed titles as well as one most claimed as lost. (Maybe borrowers figure they can replace it at face value.) All told, just 262 libraries worldwide report having a copy, according to the Online Computer Library Center, an international database that includes about 95% of academic libraries and 75% of public libraries.

You can find the link to Amazon's page for Klarman's book in the "Essential Reading" menu on the lower right hand side of this blog.

August 01, 2006

Priestly Words for Comcast

This week's Barron's interviews William Wallace Priest, CEO of Epoch Investment Partners. One of the companies he recommends is Comcast Corp. Regular readers know I own the Class A Special series of Comcast stock (CMCSK/NASDAQ).

In fact, Priest says the company is his top pick in the communications sector:

The Philadelphia company is a leading broadband communications company. Its upgraded broadband network is a competitive advantage allowing the company to deliver multiple services at low incremental cost and reignite growth. With upgrade capital spending largely complete, Comcast has begun to generate meaningful amounts of free cash flow, which it has begun to deploy in shareholder-friendly ways.

Over the last two years, Comcast has repurchased almost $6 billion of common stock or equivalents. It has $3.9 billion remaining on its share-repurchase authorization. Applying current multiple to year-ahead free cash flow suggests Comcast will generate a return of over 20% in the next 18 months.

As a shareholder, I applaud the company's stock buybacks. CEO Brian Roberts seems one sharp dude and deserves enormous credit for not only repurchasing shares, but repurchasing a meaningful amount of them. Lots of companies announce plans to repurchase up to a certain number of shares -- with "up to" being the words to watch out for -- and never buy back anywhere near enough of their shares.

Some may quibble with Roberts for not paying a dividend. But the amount of money Comcast is using for its share buybacks leaves that criticism muted, at least for me.

Comcast was recommended on Controlled Greed at $26.73 per share last November. The stock ended yesterday at $34.28, so it's up 28.3% since being bought. The company announced good results last week.


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